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CYCLES


GDX Approaching Key Support

06/17/09 09:05:18 AM
by Donald W. Pendergast, Jr.

Gold mining stocks have pulled back recently, but now they may be setting up for a short-term reaction move higher.

Security:   GDX
Position:   N/A

The Market Vectors Gold Miners ETF (GDX) offers gold bugs one of the easiest ways imaginable to buy a basket of major gold producers. This exchange traded fund has been around for a few years now and has proven to be very popular with traders and longer-term investors alike. It's had a great run since October 2008, having risen nearly 200% before topping out earlier this month. Right now, GDX is in the midst of a corrective move lower, and the big question is this: Are gold mining shares approaching another key long-term buying opportunity, or are they merely setting up for a minor reaction move higher off of key support levels?

FIGURE 1: GDX, DAILY. Even though GDX's major daily uptrend has reversed, crafty traders may still be able to anticipate and profit from a potential reaction move higher from key Fibonacci support levels and/or a cyclical low.
Graphic provided by: MetaStock.
Graphic provided by: WB Detrend EOD from ProfitTrader for MetaStock.
 
GDX's daily graph (Figure 1) reveals a great deal of information that the astute gold bug can use to maximum advantage. Any stock or commodity that can nearly triple in price in a matter of seven months is sure to attract plenty of attention, and GDX is no exception. The general public (less-informed traders/investors who don't study the science of charting) will normally be convinced that such a powerful uptrend is sure to continue without any major corrective moves getting in the way of even higher price levels. Of course, that's generally when a substantial trend reversal usually commences, similar to the current price action on the GDX chart.

A major clue that warned of a trend reversal was/is the negative divergence of the Chaikin money flow (CMF)(100) indicator with the upward trend of GDX; the CMF peaked in early April 2009, never reaching (much less exceeding) the same level despite another impressive upswing in the stock. As far as the recent selloff goes, GDX has descended to touch its Fibonacci 50% retracement (of the April-May 2009 swing) level and its 50-day exponential moving average (EMA), both of which have combined to produce at least a temporary support barrier. As of yesterday's close, GDX was already 19 bars into its current price cycle (measured from swing low to swing low), one that typically produces a noticeable swing low every 18 to 23 bars. The most recent cycles came in at 27 and 21 bars, respectively, so GDX may be getting close to (or is already at) a significant short-term cyclical turning point. This observation is further confirmed by the action of the detrend oscillator (top of the chart), which is already extended to a level that could easily coincide with a cyclical turn.

The price action of the next few sessions should reveal much about the strength level of GDX; for example, if the 50-day EMA fails to hold GDX up, expect a quick move down toward the Fibonacci 62% retracement, which also coincides with a May 2009 swing low near $36.50. GDX's weekly chart (not shown) also has a major uptrend support level near $36.00-$36.50, another powerful confirmation that GDX could very well initiate a reversal higher from the mid-$36 zone.

Playing GDX for a quick reversal move might look something like this. On a daily chart, plot the stochRSI (10)indicator and wait for the indicator to turn upward across its lower signal line. During the next session, buy half a position in GDX on a buy-stop above the previous bar's daily high and buy the other half (if possible) on a 15-minute pullback down to a Fibonacci 50% to 62% support level near its 50-period EMA. Once filled, place a stop-loss below the daily bar that turned the stochRSI higher. The idea is to capitalize on a fast reaction move up from cyclical/Fibonacci support, so be nimble and lock in profits as they may appear, using perhaps a two-bar trailing stop of the lows, prepared to close out the entire position if prices get close to $41.00 to $42.00, near the prior swing high.

Longer term, the fundamentals and technicals for the gold and gold mining industry appear to be outstanding, but right now, GDX is in a de facto daily downtrend, approaching a significant support area that coincides with a potential cyclical turning point. Nimble traders who anticipate this reversal may be able to make some money, providing they don't overstay their welcome, so to speak.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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Date: 06/17/09Rank: 4Comment: 
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